Are regulatory obstacles to impact investing here to stay?

FCA and FOS share their views

· Social Investment,Regulation,FCA,FOS,Impact Finance

In their response to a letter of recommendation on how to improve the regulatory regime for social impact investing, the FCA and FOS have responded warmly to the industry while offering less in the way of meaningful change than might be hoped for.

While both regulators welcome the group’s work and recommendations, and wish to continue to engage positively with the industry, there was little action that they felt able take at present.

The letter of recommendations

In November 2017, an independent advisory group to HM Treasury and DCMS published a report on growing a culture of social impact investing in the UK. The report covered challenges and opportunities in the growth of social impact investing, and included recommendations for stakeholders, regulators and policy makers to build their capability to help support the market’s growth.

Alongside the report, a joint letter was sent to the Financial Conduct Authority (FCA) and Financial Ombudsman Service (FOS), from Elizabeth Corley, vice chair of Allianz Global Investors and chair of the advisory group. It threw light on a number of challenges, widely viewed across the industry as being key obstacles to the rise of impact investing, including:

A lack of confidence from advisers and discretionary managers in how to undertake suitability whilst also taking into account a client’s non-financial investment goals; and

Insufficient clarity around how complaints for social investment products and services would be handled.

The regulatory restrictions on the promotion of fund structures and perceived restrictions for allocation to illiquid assets;

In addition to highlighting the three areas listed above, the letter also echoed the three relevant recommendations made in a recent Law Commission report around social impact investment and pension funds.

The FCA and FOS have written separate responses to the letter, both welcoming the recommendations and engaging positively with the work of the advisory group

The view of the FCA is that there is space within the current regulatory framework for products with a social angle, and that where obstacles have been identified there are not easy ways to tackle these while also staying true to its objectives of protecting investors and the integrity of the markets.

Regarding the issue of uncertainty around undertaking suitability on impact investment, something we hear of often, the FCA has concerns around how to best enable advisors without creating unintended consequences. The response states that tailored guidance or examples of best practice for advisors, might result in artificially restrict firms’ appetite to explore what’s possible.

The FCA addressed concerns around liquidity requirements and will further consider further steps, particularly around changes to guidance and rule on permitted links.

The lack of consistent social impact measurement and valuation was cited as a key hindrance to the development of the sector; however the FCA is keen to connect with innovative business models and encourages those developing new products and services to contact its Innovation Hub. They also specifically encourage engagement with the new Asset Management hub, for any new managers considering impact investing in their fund strategies.

The FCA are still considering their final response to the Law Commission report, but have contributed to the government’s interim response here.

This response was naturally centered around complaints, which has been a significant concern to many advisors keen to recommend impact investments to their clients.

The FOS promises to review their communications this year to provide more clarity on how they approach complaints with a social impact angle, including how they would calculate non-financial losses and the basis of any redress awards.

The letter suggests we can expect more information and online resources such as webinars, and this should help to limit the uncertainty felt presently around the consequences of unhappy clients.